When banks stop hoarding cash and start lending again, this will be one of the first signs the current crisis is passing, Praemium chairman Don Stammer believes.
“Advisers need to watch credit default swaps coming down, which will be another sign the banking crisis is coming to an end,” he told the Association of Financial Advisers Conference in Melbourne.
“The threat of a financial meltdown will pass and as the weeks go by confidence will be restored.”
Stammer said Australian bank shares were looking attractive as they have survived the crisis quite well.
He cited the fact that the big five Australian banks have kept their AAA ratings, making them some of the highest rated banks in the world.
“Australian banks have maintained a discipline in sub-prime (low doc) mortgages unlike their US counterparts,” he said.
“Our banks have come through the crisis really well.”
While bank stocks are looking attractive, Stammer said there was still some pain to be endured from the Australian stock market.
“It is important to recognise the size of the cycle,” he said.
“The share market is still pessimistic and the credit crunch is having prolonged deep effects on markets.
“So expect some more pain and volatility.”
Stammer said the first year of recovery for stock markets would be when investors are displaying more confidence about investing.
“We will then see seven years of investors going back to basics, with low borrowings and tighter supervision of markets by regulators,” he said.
“Later that nervousness will fade and people will become optimistic about share markets again.”
Stammer said this is when the next cycle starts, with investors becoming overoptimistic and regulators winding back tight controls.
It has been a cycle that has been occurring with regular timing since the middle of the 19th century, he said.
In the current phase of the cycle, Stammer is recommending investors look to top up shareholdings as the price of many stocks are at considerable lows.
“The next few months will see markets oversold, so investors can benefit from dollar cost averaging with depressed prices,” he said.
“I see 2009 as the year of recovery for shares after some downgrades before then.”
